RETURN ON EQUITY OF 19.8%, COMPARED TO 20.9%

Transcription

1 First Quarter results 2012 REPORT TO SHAREHOLDERS Q1/2012 First quarter financial measures compared to the same period a year ago: EARNINGS PER SHARE (DILUTED) OF $1.20 COMPARED TO $1.08 NET INCOME OF $1,436 MILLION, VERSUS $1,249 MILLION RETURN ON EQUITY OF 19.8%, COMPARED TO 20.9% PRODUCTIVITY RATIO OF 53.5%, VERSUS 53.3% QUARTERLY DIVIDEND 55 CENTS PER COMMON SHARE Scotiabank reports strong first quarter earnings of $1.4 billion and increased its quarterly dividend by 3 cents per share YEAR-TO-DATE PERFORMANCE versus key 2012 financial and operational objectives was as follows: TARGETS 1 Earn a return on equity (ROE) (1) of 15 to 18%. For the three months Scotiabank earned an ROE of 19.8%. 2 Generate growth in earnings per common share (diluted) of 5to10% (2). Our year-over-year growth in earnings per share was 11.1%. 3 Maintain a productivity ratio (1) of less than 58%. Scotiabank s ratio was 53.5% for the three months. 4 Maintain strong capital ratios. At 11.4%, Scotiabank s Tier 1 capital ratio remains strong by both Canadian and international standards. (1) Refer to page 5 for a discussion of non-ifrs measures. (2) Excluding $286 million of acquisition-related gains reported in the second quarter of. Live audio Web broadcast of the Bank s analysts conference call. See page 87 for details. For more information on Scotiabank s Investor Relations, scan the QR code (right) or visit scotiabank.com/investorrelations Toronto, March 6, 2012 Scotiabank reported first quarter net income of $1,436 million compared with net income of $1,249 million in the same period last year. Year over year, net income grew 15%. Diluted earnings per share were $1.20, compared to $1.08 in the same period a year ago, an increase of 11%. Return on equity remained strong at 19.8%. This quarter benefitted from a gain on the sale of a real estate asset in Western Canada which amounted to 8 cents per share. A dividend of 55 cents per common share was announced, an increase of 3 cents. Consistent execution of our strategy and focus on our core businesses has led to a strong quarter, said Rick Waugh, Scotiabank President and CEO. While we continue to watch global economic conditions closely, diversification across our business and focus on high growth international economies have continued to contribute to our results. Canadian Banking had an excellent quarter, reporting net income of $475 million, with higher volumes and increased transaction-based revenues. Revenue growth reflects our ongoing strategy to grow our payments, wealth management and card businesses. Each of retail, commercial and small business have performed well. With net income of $391 million, International Banking had a very good quarter. Continued emphasis on increasing assets and deposits resulted in strong volume growth in Latin America and Asia. Earnings reflected the benefit of diversification across international operations and stable credit conditions, despite lower contributions from Thanachart Bank given the recent flooding in Thailand. Strong performance in our global insurance and wealth businesses enabled Global Wealth Management to achieve net income for the quarter of $288 million. Increasing cross-sell of insurance, combined with new products and enhancements to existing products are driving strong results in our business globally. Global Banking and Markets (formerly Scotia Capital) reported strong net income of $311 million this quarter. Our diversified trading platform produced solid results for the quarter, including record revenues from ScotiaMocatta. These gains were partially offset by the continued competitive environment and margin pressures in other businesses. Across the Bank, we continue to manage our expenses very prudently. Our productivity ratio is in line with that of the same period last year and well within our target range. Our capital position remains strong. In February, we successfully raised capital to fund recently closed and previously announced acquisitions. We remain confident that we will achieve the minimum Canadian regulatory expectations for Basel III by the first quarter of 2013, which is well in advance of the international Basel III requirements. As these results show, effective execution of our five-point strategy continues to deliver sustainable profitability. Based on our strong first quarter results, we are wellpositioned to achieve our goals for 2012.

2 FINANCIAL HIGHLIGHTS (1) (Unaudited) 2012 As at and for the three months ended October 31 July 31 April 30 Operating results ($ millions) Net interest income 2,375 2,329 2,296 2,136 2,253 Net interest income (TEB (2) ) 2,380 2,334 2,302 2,141 2,258 Net fee and commission revenues 1,500 1,489 1,467 1,527 1,244 Other operating income Other operating income (TEB (2) ) , Total revenue 4,647 4,248 4,324 4,646 4,191 Total revenue (TEB (2) ) 4,715 4,322 4,397 4,715 4,262 Provision for credit losses Operating expenses 2,507 2,489 2,348 2,395 2,249 Provision for income taxes Provision for income taxes (TEB (2) ) Net income 1,436 1,157 1,303 1,621 1,249 Net income attributable to common shareholders 1,343 1,071 1,209 1,528 1,157 Operating performance Basic earnings per share ($) Diluted earnings per share (3) ($) Diluted cash earnings per share (2)(3) ($) Return on equity (2) (%) Productivity ratio (%) (TEB (2) ) Core banking margin (4) (%) (TEB (2) ) Financial position information ($ millions) Cash and deposits with banks 52,891 45,222 48,706 63,352 44,634 Trading assets 88,086 75,799 87,070 88,618 80,528 Loans to customers 341, , , , ,225 Total assets 637, , , , ,415 Deposits 451, , , , ,752 Common equity 28,112 26,356 25,605 24,641 22,285 Preferred shares 4,384 4,384 4,384 4,384 3,975 Assets under administration (5) 310, , , , ,268 Assets under management (5) 106, , , ,944 55,814 Capital measures (6) Tier 1 capital ratio (%) Total capital ratio (%) Tangible common equity to risk-weighted assets (2) (%) Assets-to-capital multiple Risk-weighted assets ($ millions) 253, , , , ,332 Credit quality Net impaired loans ($ millions) 1,914 2,084 2,138 2,248 2,294 Allowance for credit losses ($ millions) 2,750 2,689 2,677 2,639 2,646 Net impaired loans as a % of loans and acceptances Provisions for credit losses as a % of average loans and acceptances (annualized) Common share information Share price ($) High Low Close Shares outstanding (millions) Average Basic 1,091 1,086 1,082 1,078 1,044 Average Diluted 1,125 1,118 1,115 1,113 1,081 End of period 1,103 1,089 1,085 1,082 1,047 Dividends per share ($) Dividend yield (7) (%) Market capitalization ($ millions) 56,840 57,204 58,799 62,434 59,090 Book value per common share ($) Market value to book value multiple Price to earnings multiple (trailing 4 quarters) Other information Employees 77,302 75,362 74,902 73,558 71,653 Branches and offices 3,116 2,926 2,910 2,853 2,794 (1) All comparative amounts except capital measures reflect the adoption of IFRS and should be read in conjuction with our press release of January 24, (2) Refer to page 5 for a discussion of non-ifrs measures. (3) Diluted earnings per share and diluted cash earnings per share under IFRS, previously reported on January 24, 2012 have been adjusted to correct for the dilution calculation of certain capital instruments and tandem stock appreciation rights. (4) The comparative numbers have been restated to conform to the current period calculations. (5) Comparative amounts have been restated to reflect intercompany relationships. (6) Prior period capital measures have not been restated for IFRS as they represent the actual amounts in that period for regulatory purposes. (7) Based on the average of the high and low common share price for the period. 2 Scotiabank First Quarter Report 2012

3 Contents 4 Notable Business Highlights Management s Discussion and Analysis 7 Transition to International Financial Reporting Standards 8 Group Financial Performance and Financial Condition 8 Financial results 10 Risk management 14 Financial position 14 Capital management 15 Common dividend 15 Financial instruments 15 Selected credit instruments 16 Off-balance sheet arrangements 16 Accounting Policies and Controls 16 Accounting policies and estimates 18 Future accounting developments 19 Changes in internal control over financial reporting 19 Related party transactions 19 Outlook 20 Business Segment Reporting Changes 21 Business Segment Review 27 Quarterly Financial Highlights 28 Share Data 29 Condensed Interim Consolidated Financial Statements 34 Notes to the Condensed Interim Consolidated Financial Statements 87 Shareholder Information Forward-looking statements Our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the United States Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the safe harbour provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may include comments with respect to the Bank s objectives, strategies to achieve those objectives, expected financial results (including those in the area of risk management), and the outlook for the Bank s businesses and for the Canadian, United States and global economies. Such statements are typically identified by words or phrases such as believe, expect, anticipate, intent, estimate, plan, may increase, may fluctuate, and similar expressions of future or conditional verbs, such as will, should, would and could. By their very nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that predictions and other forward-looking statements will not prove to be accurate. Do not unduly rely on forwardlooking statements, as a number of important factors, many of which are beyond our control, could cause actual results to differ materially from the estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the economic and financial conditions in Canada and globally; fluctuations in interest rates and currency values; liquidity; significant market volatility and interruptions; the failure of third parties to comply with their obligations to us and our affiliates; the effect of changes in monetary policy; legislative and regulatory developments in Canada and elsewhere, including changes in tax laws; the effect of changes to our credit ratings; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions and liquidity regulatory guidance; operational and reputational risks; the risk that the Bank s risk management models may not take into account all relevant factors; the accuracy and completeness of information the Bank receives on customers and counterparties; the timely development and introduction of new products and services in receptive markets; the Bank s ability to expand existing distribution channels and to develop and realize revenues from new distribution channels; the Bank s ability to complete and integrate acquisitions and its other growth strategies; changes in accounting policies and methods the Bank uses to report its financial condition and the results of its operations, including uncertainties associated with critical accounting assumptions and estimates; the effect of applying future accounting changes; global capital markets activity; the Bank s ability to attract and retain key executives; reliance on third parties to provide components of the Bank s business infrastructure; unexpected changes in consumer spending and saving habits; technological developments; fraud by internal or external parties, including the use of new technologies in unprecedented ways to defraud the Bank or its customers; consolidation in the Canadian financial services sector; competition, both from new entrants and established competitors; judicial and regulatory proceedings; acts of God, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments, including terrorist acts and war on terrorism; the effects of disease or illness on local, national or international economies; disruptions to public infrastructure, including transportation, communication, power and water; and the Bank s anticipation of and success in managing the risks implied by the foregoing. A substantial amount of the Bank s business involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on the Bank s financial results, businesses, financial condition or liquidity. These and other factors may cause the Bank s actual performance to differ materially from that contemplated by forward-looking statements. For more information, see the discussion starting on page 63 of the Bank s Annual Report. The preceding list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Bank and its securities, investors and others should carefully consider the preceding factors, other uncertainties and potential events. The Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on its behalf. The Outlook sections in this document are based on the Bank s views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing these sections. Additional information relating to the Bank, including the Bank s Annual Information Form, can be located on the SEDAR website at and on the EDGAR section of the SEC s website at Scotiabank First Quarter Report

4 2012 Objectives Scotiabank s Balanced Scorecard Financial People Customer Operational Return on equity of 15-18% Earnings per common share growth of 5-10%* Maintain strong capital ratios * Excluding $286 million of acquisition related gains reported in the second quarter of. High levels of employee engagement Enhanced diversity of workforce Advancement of women Leadership development Collaboration High levels of customer satisfaction and loyalty Deeper relationships with existing customers Productivity ratio of <58% Strong practices in corporate governance and compliance processes Efficiency and expense management Commitment to corporate social responsibility Notable Business Highlights Growing our business In January 2012, Scotiabank closed the acquisition of a 51% investment in Banco Colpatria, Colombia s 5th largest bank. In Canada, Scotiabank s You re Richer Than You Think campaign evolved with the launch of the Richness Is program. This launch was anchored with the promotion of a 5-Year Plan where individualized plans include tailored advice from a Scotia advisor, a practical, easy-tofollow plan, and realistic milestones to measure progress. Recognized for success Global Finance Magazine has named Scotiabank Best Trade Finance Bank in Canada for 2012, the sixth time in seven years. Global Finance also named Scotiabank as the Best Foreign Exchange Bank in Canada, Jamaica and Peru. At the Canadian Investment Awards, Dynamic Funds was recognized as Analysts Choice Fund Company of the Year and Scotia itrade s new Commission-Free ETF program was recognized with the Best ETF Initiative. Scotiabank was ranked fourth (with the third highest score) out of 253 corporations in the Globe and Mail s tenth annual Report on Business Board Games report. The rankings publish a score based on board composition, shareholding and compensation, disclosure rules and shareholder rights. Serving our customers TheScotiabank StartRight Program for newcomers to Canada has been expanded to include Mexico. Similar to those living in China and India, individuals immigrating to Canada from Mexico can now open their account in Canada and transfer funds before leaving their home country. In Canada, we launched twelve Dynamic Funds and Scotia Asset Management products through third party 4 Scotiabank First Quarter Report 2012 retail financial advisors, ScotiaMcLeod and high net worth private client channels. Internationally we launched four more funds. ScotiaLife Financial launched a new ScotiaLife Travel Insurance Program in Canada, offering customers a variety of options that allow them to select the coverage that best fits their travel needs. Outside of Canada we expanded our insurance sales force. Scotiabank.com and Scotia OnLine were redesigned to make it easier to navigate the wide range of online options with improved access to Scotiabank s products and services. A customer-centric landing page was introduced as the initial access point to the broad scope of Scotiabank s operations. Scotiabank acted as exclusive financial advisor to Pembina Pipeline Corporation on its acquisition of Provident Energy Ltd., a transaction valued at approximately $3.8 billion. The combined entity will be the third largest energy transportation and service provider in Canada with an enterprise value of approximately $10 billion. Scotiabank served as Joint Bookrunner on a US$500 million bond issuance for Chilean-based Celulosa Arauco y Constitucion S.A., a producer of forestry and wood products with the second largest installed pulp capacity in the world. A sampling of the Scotiabank s Bright Future program in action Scotiabank Bahamas provided support to The Bahamas AIDS Foundation in hosting the Red Ribbon Ball. The Ball is the Foundation s single largest fundraising initiative, now in its eighteenth year. More than 200 Scotiabankers delivered over 1,000 Christmas gifts visiting children s orphanages all over Chile. Scotiabank is providing a five-year commitment to the YMCA of Fredericton s Strong Kids Program to assist the organization in supporting the needs of youth-at-risk.

5 MANAGEMENT S DISCUSSION & ANALYSIS Non-IFRS Measures The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with International Financial Reporting Standards (IFRS), are not defined by IFRS and do not have standardized meanings that would ensure consistency and comparability between companies using these measures. These non-ifrs measures are used throughout this report and defined below. Assets under administration (AUA) AUA are assets administered by the Bank which are beneficially owned by clients and therefore not reported on the Bank s statement of financial position. Services provided for AUA are of an administrative nature, such as trusteeship, custodial, safekeeping, income collection and distribution; securities trade settlements, customer reporting, and other similar services. Assets under management (AUM) AUM are assets managed by the Bank on a discretionary basis and in respect of which the Bank earns investment management fees. AUM are beneficially owned by clients and are therefore not reported on the Bank s consolidated statement of financial position. Some AUM are also administered assets and are therefore included in assets under administration, under these circumstances. Diluted cash earnings per share The diluted cash earnings per share is calculated by adjusting the diluted earnings per share to add back the non-cash after tax amortization of intangible assets. Economic equity and return on economic equity For internal reporting purposes, the Bank attributes capital to its business segments based on their risk profile and uses a methodology that considers credit, market, operational and other risks inherent in each business segment. The amount of risk capital attributed is commonly referred to as economic equity. Return on economic equity for the business segments is calculated as a ratio of Adjusted Net Income of the business segment and the economic equity attributed. Adjusted Net Income is net income attributable to common shareholders adjusted for the incremental cost of non-common equity capital instruments. Core banking margin (TEB) This ratio represents net interest income (on a taxable equivalent basis) on average total assets excluding total average assets relating to the Global Capital Markets business within Global Banking and Markets. This is consistent with the classification of net interest from trading operations in revenues from trading operations recorded in other operating income. Operating leverage (TEB) The Bank defines operating leverage as the rate of growth in total revenue (on a taxable equivalent basis) and impairment losses on investment securities, less the rate of growth in operating expenses. Productivity ratio (TEB) Management uses the productivity ratio as a measure of the Bank s efficiency. This ratio represents operating expenses as a percentage of total revenue (TEB). Total revenue (on a taxable equivalent basis) is adjusted to include impairment losses on investment securities. Return on equity Return on equity is a profitability measure that presents the net income attributable to common shareholders as a percentage of common shareholders equity. The Bank calculates its return on equity using average common shareholders equity. Tangible common equity to risk-weighted assets Tangible common equity to risk-weighted assets is an important financial measure for rating agencies and the investing community. Tangible common equity is total common equity plus non-controlling interests in subsidiaries, less goodwill and unamortized intangible assets (net of taxes). Tangible common equity is presented as a percentage of riskweighted assets. Regulatory capital ratios, such as Tier 1 and Total Capital ratios, have standardized meanings as defined by the Office of the Superintendent of Financial Institutions Canada (OSFI). Scotiabank First Quarter Report

6 MANAGEMENT S DISCUSSION & ANALYSIS Taxable equivalent basis The Bank analyzes net interest income, other operating income, and total revenue on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt income earned on certain securities reported in either net interest income or other operating income to an equivalent before tax basis. A corresponding increase is made to the provision for income taxes; hence, there is no impact on net income. Management believes that this basis for measurement provides a uniform comparability of net interest income and other operating revenue arising from both taxable and non-taxable sources and facilitates a consistent basis of measurement. While other banks also use TEB, their methodology may not be comparable to the Bank s methodology. For purposes of segmented reporting, a segment s revenue and provision for income taxes are grossed up by the taxable equivalent amount. The elimination of the TEB gross up is recorded in the Other segment. The TEB gross up to net interest income, other operating income, total revenue, and provision for income taxes are presented below: TEB Gross up ($ millions) For the three months ended October 31 July 31 April Net interest income $ 5 $ 5 $ 6 $ 5 $ 5 Other operating income Total revenue and provision for taxes $ 68 $ 74 $ 73 $ 69 $ 71 6 Scotiabank First Quarter Report 2012

7 Quarterly financial information Transition to International Financial Reporting Standards The Bank has adopted International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board effective November 1,. The accompanying condensed interim consolidated financial statements for the three months ended, 2012 have been prepared in accordance with IAS 34, Interim Financial Reporting. As these are the Bank s first financial statements prepared under IFRS, the provisions of IFRS 1, First-time Adoption of IFRS, have been applied. Previously, the consolidated financial statements were prepared in accordance with Canadian GAAP (CGAAP). The notes to the condensed interim consolidated financial statements bridge prior financial statement disclosures under CGAAP and IFRS, and are designed to assist the reader in understanding the nature and quantum of differences between them. For an overview of the impacts of the adoption of IFRS, including a description of accounting policies selected, refer to Note 30, First-time adoption of IFRS of the condensed interim consolidated financial statements, as well as pages 83 to 89 of the Bank s Annual Report. Effects of IFRS on the Consolidated Statement of Income For the three months ended For the year ended October 31,, October 31, ($ millions) IFRS CGAAP IFRS CGAAP IFRS CGAAP Net interest income $2,329 $2,251 $2,253 $2,168 $9,014 $8,706 Net fee and commission revenues 1,489 1,506 1,244 1,268 5,727 5,795 Other operating income ,668 2,890 Provision for credit losses ,076 1,046 Impairment losses on investment securities Operating expenses 2,489 2,519 2,249 2,286 9,481 9,564 Income tax expense ,423 1,410 Net income $1,157 $1,240 $1,249 $1,200 $5,330 $5,268 Net income attributable to non-controlling interests $ 31 $ 17 $ 41 $ 26 $ 149 $ 93 Non-controlling interests in subsidiaries Capital instrument equity holders 14 N/A 15 N/A 58 N/A Net income attributable to equity holders of the Bank $1,126 $1,223 $1,208 $1,174 $5,181 $5,175 Preferred shareholders Common shareholders 1,071 1,168 1,157 1,123 4,965 4,959 The difference of $62 million in net income for the year ended October 31, (three months ended October 31, $83 million; three months ended, $49 million) is mainly due to the securitized mortgages being recorded onbalance sheet, the consolidation of previously unconsolidated special purpose entities including capital instruments, changes in measurement of employee benefits, and changes in functional currencies of certain foreign subsidiaries. Effects of IFRS on Operating Performance For the three months ended For the year ended October 31,, October 31, ($ millions) IFRS CGAAP IFRS CGAAP IFRS CGAAP Basic earnings per share $0.99 $ 1.08 $1.11 $ 1.08 $4.63 $ 4.62 Diluted earnings per share (1) Diluted cash earnings per share (1)(2) Return on equity (2) 16.4% 16.6% 20.9% 18.7% 20.3% 18.8% Productivity ratio (TEB (2) ) Core banking margin (TEB (2) ) 2.07 N/A 2.21 N/A 2.11 N/A Net impaired loans as a % of loans and acceptances Provision for credit losses as a % of average loans and acceptances 0.34 N/A 0.36 N/A 0.34 N/A (1) Diluted earnings per share and diluted cash earnings per share under IFRS, previously reported on January 24, 2012 have been adjusted to correct for the dilution calculation of certain capital instruments and tandem stock appreciation rights (Tandem SARs). (2) Refer to page 5 for a discussion of non-ifrs measures. Refer to Accounting policies and estimates on pages 16 to 17, or Note 3 and Note 30 of the condensed interim consolidated financial statements for further details of the transition to IFRS. Scotiabank First Quarter Report

8 MANAGEMENT S DISCUSSION & ANALYSIS Group Financial Performance and Financial Condition March 6, 2012 Financial results Scotiabank s net income for the first quarter was $1,436 million, compared with $1,249 million for the same period last year and $1,157 million last quarter. Diluted earnings per share were $1.20 (including a gain on sale of a real estate asset in Western Canada of 8 cents per share), compared to $1.08 in the same period a year ago and $0.97 last quarter. Return on equity remained strong at 19.8%, compared to 20.9% last year and 16.4% last quarter. Total revenue Total revenue (on a taxable equivalent basis) was $4,715 million, up $453 million or 11% from the same quarter last year. Acquisitions accounted for $295 million of this increase. The remaining growth was attributable to higher net interest income from asset growth, higher banking fees, stronger trading revenues, and the real estate gain. Net interest income Impact of foreign currency translation The table below reflects the impact of foreign currency translation on the year-over-year and quarter-over-quarter change in key income statement items. The impact of foreign currency translation was not significant quarter over quarter or year over year. ($ millions except per share amounts) Jan. 31, 2012 vs. Jan. 31, For the three months ended Jan. 31, 2012 vs. Oct. 31, U.S./Canadian dollar exchange rate (average), 2012 $ $ October 31, $ 1.001, $ % change 2% 2% Impact on income: Net interest income $ (5) $ 8 Net fee and commission revenues (4) 3 Other operating income (9) (4) Operating expenses 11 (2) Other items (net of tax) 2 (2) Net income $ (5) $ 3 Earnings per share (diluted) $ $ Impact by business line: Canadian Banking 1 1 International Banking (7) 4 Global Wealth Management 1 Global Banking and Markets (3) (7) Other 4 4 Q vs Q1 Net income Scotiabank s net income was $1,436 million in the first quarter, an increase of $187 million or 15% from the same period a year ago. The increase included the after-tax real estate gain of $94 million. Excluding this gain, net income was up 7%. Contributing to these strong results was an increase in net interest income, growth in wealth management revenues from the inclusion of DundeeWealth Inc. (DundeeWealth), higher trading revenues and strong transaction-based fees. These increases were partly offset by higher operating expenses. This quarter s net interest income (on a taxable equivalent basis) of $2,380 million was $122 million or 5% higher than the same quarter last year. This was attributable to asset growth, primarily in business lending, residential mortgages and deposits with banks. The core banking margin was 2.03% down from 2.21% last year. The decline in the margin was primarily from a narrower spread on the Canadian fixed rate portfolio, higher volumes of low spread deposits with banks and non-earning assets. This was partially offset by a wider spread on Canadian floating rate products, higher margins in Peru and Asia and the acquisitions in Uruguay. Net fee and commission revenues Net fee and commission revenues of $1,500 million was a substantial $256 million or 21% higher than the same period last year. The growth was attributable primarily to wealth management revenues which were up $204 million mainly from the DundeeWealth acquisition. Banking fees were $63 million above the prior year, mainly from higher credit fees across all business lines, the acquisitions in Uruguay and higher credit card transactions. Other operating income Other operating income (on a taxable equivalent basis) was $75 million higher at $835 million. This quarter included $111 million from the gain on sale of a real estate asset. Trading revenue was up from the same period last year, mainly in fixed income and precious metals. Net gains on sale of investment securities of $80 million rose $13 million. Net income from investments in associated corporations fell from the prior year reflecting lower earnings from Thanachart Bank in Thailand as a result of the flooding in that country, and the inclusion of the 19% equity pick up of DundeeWealth in the prior period. As well, the first quarter last year benefitted from a foreign currency translation gain of $38 million relating to foreign operations which were hedged later in. 8 Scotiabank First Quarter Report 2012

9 MANAGEMENT S DISCUSSION & ANALYSIS Provision for credit losses and impairment losses on investment securities The provision for credit losses was $265 million this quarter, down $10 million from the same period last year. The yearover-year decline was due primarily to lower provisions in retail and commercial lending in Canadian Banking, offset by higher provisions in International Banking and Global Banking and Markets. Further discussion on credit risk is provided on page 10. The impairment losses on investment securities were $26 million, compared to $43 million last year. Operating expenses and productivity Operating expenses were $2,507 million this quarter, up $258 million from the same quarter last year. Acquisitions accounted for $211 million of the increase. The remaining growth was mostly in compensation-related expenses which rose due to higher staffing levels and annual merit increases. Pension and benefit expenses were up this quarter, as the prior year included a $35 million benefit from the final wind-up and settlement of a subsidiary s pension plan. The productivity ratio was 53.5%, in line with the 53.3% in the same quarter last year. Operating leverage year over year was negative 0.4%. However, adjusting for the impact of recent acquisitions, the real estate gain this quarter and the pension gain in, operating leverage was positive 2.0%, reflecting the cost management actions put in place. Taxes The effective tax rate for this quarter was 22.3%, slightly lower than 23.1% in the first quarter last year. This decline was due primarily to a reduction in the statutory tax rate in Canada, lower taxes on the gain on sale of the real estate asset and a lower future tax adjustment. These were partially offset by a reduction in tax-exempt income. Q vs Q4 Net income Net income was $1,436 million, an increase of $279 million or 24% compared to the fourth quarter, due primarily to stronger trading revenues, the gain on sale of the real estate asset, growth in net interest income, increases in underwriting revenues, higher transaction-based banking fees and lower provisions for credit losses. These items were partly offset by a slight increase in operating expenses and the impact of a higher effective income tax rate. Total revenue Total revenue (on a taxable equivalent basis) of $4,715 million was $393 million or 9% higher quarter over quarter. The growth was primarily in other operating income from stronger trading results and the real estate gain. Net interest income was higher from asset growth. Net fee and commission revenues were up modestly. Net interest income Net interest income (on a taxable equivalent basis) was $2,380 million, up $46 million or 2% from the previous quarter. This was attributable to asset growth, primarily in business lending, residential mortgages and deposits with banks. The core banking margin of 2.03% was down slightly from 2.07% last quarter. The slight decline in net interest margin was due to higher volumes of non-earning assets and narrower spread on the Canadian fixed rate portfolio. This was partly offset by wider spreads in Chile, Asia and Uruguay, as well as a wider spread in the Canadian floating rate portfolio. Net fee and commission revenues Compared to the previous quarter, net fee and commission revenue of $1,500 million was up $11 million or 1%. Revenues were up from stronger underwriting and other advisory fees and higher card revenues in both Canadian and International Banking. Other operating income Other operating income (on a taxable equivalent basis) rose a substantial $336 million or 67% to $835 million. Revenue from trading operations was $159 million higher at $385 million, mainly in fixed income, equities and precious metals due to improved market conditions. This quarter included the real estate gain and a favourable change in the fair value of financial instruments. The prior quarter included foreign currency translation losses related to unhedged available-for-sale equity securities, (which have since been hedged) which were partially offset by the recognition of negative goodwill related to an acquisition. Gains on investments securities of $80 million were $7 million lower than the prior quarter. The net income from investments in associated corporations fell $16 million, primarily from a reduced contribution from Thanachart Bank. Provision for credit losses and impairment losses on investment securities The provision for credit losses was $265 million this quarter, down $16 million from the prior quarter. The quarter-over- Scotiabank First Quarter Report

10 MANAGEMENT S DISCUSSION & ANALYSIS quarter decline in provisions was due mainly to decreases in commercial provisions in International Banking and Global Banking and Markets, partly offset by slightly higher provisions in Canadian Banking. Further discussion on credit risk is provided below. Impairment losses on investment securities were in line with last quarter. Operating expenses and productivity The Bank continues to manage its expense growth prudently. Compared to the fourth quarter, operating expenses were relatively stable with a slight increase of $18 million or 1%. This growth was due primarily to higher compensation-related and business and capital taxes partly offset by a decrease in advertising and premises and technology costs. Compensation-related expenses were up due to higher staffing levels and higher stockbased compensation. The latter was mainly from the impact of vesting of new grants awarded to employees eligible to retire. The productivity ratio was 53.5%, compared to 57.9% in the previous quarter. Quarter over quarter, the operating leverage was 8.3%, or 6.5% excluding the real estate gain, and acquisitions. Taxes The effective tax rate for this quarter was 22.3%, up from 20.5% in thepriorquarter.theincreaseintheeffectivetaxratewas primarily due to lower tax-exempt income and higher income in higher tax jurisdictions. Partially offsetting these items were lower taxes on the real estate gain and a lower statutory rate in Canada. The prior quarter also included the write down of a deferred tax asset related to a loss on disposal of subsidiary operations in a prior year. Risk management The Bank s risk management policies and practices are unchanged from those outlined in pages 63 to 77 of the Annual Report, however additional market risk measures were implemented this quarter. Refer Market Risk section on pages 13 to 14. Credit risk Provision for credit losses Q vs Q1 The provision for credit losses was $265 million this quarter, compared to $275 million in the same period last year. The provision for credit losses was $136 million in Canadian Banking, down from $165 million in the same quarter last year. The lower provisions were broad based across virtually all of Canadian Banking s retail and commercial businesses. 10 Scotiabank First Quarter Report 2012 International Banking s provision for credit losses was $124 million this quarter, compared to $113 million in the same period last year. Higher retail provisions in Peru, Chile and Uruguay were partially offset by lower retail provisions in the Caribbean, and moderately lower commercial provisions. Global Banking and Markets provision for credit losses was $5 million this quarter, compared to net reversals and recoveries of $3 million in the same period last year. In the current period, new provisions relating to two accounts in the U.S. were partially offset by recoveries related to two other accounts in the U.S. Q vs Q4 The provision for credit losses was $265 million this quarter, compared to $281 million in the previous quarter. Prior quarter included a reduction of $30 million in the collective allowance for credit losses related to performing loans. The provision for credit losses was $136 million in Canadian Banking, relatively unchanged from the previous quarter. Higher retail provisions were almost completely offset by lower commercial provisions. International Banking s provision for credit losses was $124 million this quarter, compared to $158 million last quarter. Retail provisions declined moderately as lower provisions in the Caribbean and Mexico, were substantively offset by higher provisions in Chile, Peru and Uruguay. Commercial provisions benefitted from broad based reductions across most geographies. Global Banking and Markets provision for credit losses was $5 million this quarter, compared to $17 million in the prior quarter. In the current period, new provisions related to two accounts in the U.S. were partially offset by recoveries related to two other accounts in the U.S. Global Wealth Management did not incur any provisions for credit losses this quarter. Allowance for credit losses Total allowances for credit losses were $2,750 million, up $61 million from $2,689 million as at October 31,. In addition, the allowance for off-balance-sheet credit risks classified as other liabilities was $185 million. Allowance for credit losses of $1,573 million related to impaired loans and $1,177 million related to performing loans as at, In International Banking, the allowance for credit losses increased $68 million to $815 million, with new allowances in the Caribbean, Peru and other Latin America, partially offset by reversals and write-offs in Chile and Peru. In Canadian Banking, the allowance of $704 million increased by $35 million from October 31, due to higher provisions for residential mortgages, personal lines of credit and credit cards.

11 MANAGEMENT S DISCUSSION & ANALYSIS Global Banking and Markets had an allowance of $52 million, up $5 million from October 31, due to new provisions in the U.S. Global Wealth Management s allowance was unchanged at $2 million. Impaired loans Total gross impaired loans at, 2012, were $3,487 million, down $62 million from October 31,, attributable to declines in most business lines. Total net impaired loans in Canadian Banking were $419 million, down from $451 million at October 31,, due to declines in retail and commercial net impaired loans. International Banking s total net impaired loans decreased to $1,429 million from $1,563 million as at October 31,, also due to declines in both retail and commercial portfolios. In Global Banking and Markets, total net impaired loans were $56 million at the end of this quarter, compared to $59 million at the end of last year. Overview of loan portfolio A large portion of the Bank s loan portfolio is comprised of residential mortgages and consumer loans, which are well diversified by borrower and geography. As at, 2012, these loans amounted to $231 billion or 66% of the Bank s total loans outstanding. 93% of Canadian Banking s portfolio and 74% of International Banking s portfolio is secured, in line with the previous quarter. Of the Canadian residential mortgage portfolio, 56% is insured, and the uninsured portion has an average loan-to-value ratio of 55%. European exposures As a result of the Bank s broad international operations, the Bank has sovereign credit risk exposure to a number of countries. The Bank actively manages this sovereign risk, including the use of risk limits calibrated to the credit worthiness of the sovereign exposure. The current European exposure is provided below: ($ millions) Loans and acceptances (1) As at, 2012 October 31, Loans and loan equivalents Other Letters of credit and guarantees (2) Undrawn commitments (3) Securities and deposits with banks (4) Security Finance Transactions (SFT) and derivatives (5)(6) Total European exposure Total European exposure (7) Gross exposures $8,041 $1,188 $7,838 $10,763 $678 $28,508 $30,438 Less: Undrawn commitments 7,838 7,946 Gross funded exposure $20,670 $22,492 (1) Net of allowance for credit losses of $25. (2) Letters of credit and guarantees are included as funded exposure as they have been issued. (3) Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time of default of an obligor. (4) Exposures for securities are calculated taking into account derivative positions where the security is the underlying reference assets and short trading positions. (5) Net of $946 in collateral held against derivatives and $4,800 held against SFT. (6) SFT comprise securities purchased under resale agreements, obligations related to securities sold under repurchase agreements and securities lending and borrowing transactions. (7) Comparative amounts have been amended to allow for a more direct comparison and now include risk exposures from trading securities. The Bank s total gross European exposure as at, 2012 was $28.5 billion (October 31, - $30.4 billion), with gross funded exposure of $20.7 billion net of undrawn commitments (October 31, - $22.5 billion). The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (80% of the exposures are to investment grade counterparties based on a combination of internal and external ratings), and are modest relative to the capital levels of the Bank. The Bank s European exposure in Level 3 assets is negligible. There have been no significant events since October 31, that have materially impacted the reported amounts. Scotiabank First Quarter Report

12 MANAGEMENT S DISCUSSION & ANALYSIS Below is the funded exposures related to all European countries: As at, 2012 October 31, ($ millions) Sovereign Bank Corporate (1) Total Total Greece $ $ $ 377 $ 377 $ 348 Ireland Italy ,202 1,206 Portugal Spain Total GIIPS $ 459 $1,294 $ 1,011 $ 2,764 $ 2,642 U.K. 2,805 1,794 3,154 7,753 7,151 Germany ,356 3,020 3,988 France (39) ,561 2,364 Netherlands ,510 1,749 Switzerland ,630 1,594 Other ,366 2,432 3,004 Total Non-GIIPS $4,072 $5,644 $ 8,190 $17,906 $19,850 Total Europe (2) $4,531 $6,938 $ 9,201 $20,670 $22,492 Total Europe as at October 31, $3,017 $8,529 $10,946 $22,492 (1) Corporate includes financial institutions that are not banks. (2) Excludes $145 in SFT/derivatives exposures to supra-national agencies. The Bank s exposure to certain European countries that have come under recent focus Greece, Ireland, Italy, Portugal or Spain (GIIPS) is not significant. As of, 2012, the Bank s current funded exposure to the GIIPS sovereign entities, as well as banks and non-bank financial institutions and corporations domiciled in these countries, totaled approximately $2.8 billion. Specific to GIIPS, the Bank s sovereign exposure to Ireland was $171 million as at, 2012, which included $147 million (October 31, $114 million) in the form of central bank deposits arising from regulatory reserves requirements to support the Bank s operations in Ireland and an SFT ($61 million and $86 million, respectively), and net $24 million long in Irish sovereign securities (October 31, net $37 million short). The Bank was net long securities in sovereign exposures to Italy ($215 million) and Spain ($73 million); the Bank had no sovereign securities holdings of Greece or Portugal. The Bank had exposures to Italian banks of $861 million, as at, 2012 (October 31, $1,083 million), primarily related to short-term precious metals trading and lending activities. Greek exposure related primarily to secured loans to shipping companies. The Bank s exposures are distributed as follows: ($ millions) Loans and loan equivalents Deposits with banks As at Securities, 2012 October 31,, 2012 SFT and derivatives Total Total Undrawn commitments Greece $ 384 $ $ (7) $ $ 377 $ 348 $ 49 Ireland Italy ,202 1, Portugal Spain Total GIIPS $1,579 $ 83 $ 997 $105 $ 2,764 $ 2,642 $ 395 U.K. 2,923 3,191 (1) 1, ,753 7,151 3,366 Germany 1, , ,020 3, France ,561 2,364 1,322 Netherlands ,510 1, Switzerland 1, ,630 1, Other 1, ,432 3, Total Non-GIIPS $7,650 $3,926 $5,757 $573 $17,906 $19,850 $7,443 Total Europe $9,229 $4,009 $6,754 $678 $20,670 $22,492 $7,838 (1) Includes $2.6 billion in deposits with the Bank of England. 12 Scotiabank First Quarter Report 2012

13 MANAGEMENT S DISCUSSION & ANALYSIS The Bank s exposure for securities is on a fair value basis. Securities exposures to European sovereigns and banks (excluding GIIPS) was $4.2 billion as at, 2012 (October 31, $5 billion), predominately related to United Kingdom, Germany and France issuers. Substantially all holdings have strong market liquidity. The majority of the current funded credit exposure is in the form of funded loans which are recorded on an accrual basis. As well, credit exposure to clients arises from client-driven derivative transactions and securities financing transactions (reverse repurchase agreements, repurchase agreements, and security lending and borrowing). OTC derivative counterparty exposures are recorded on a fair value basis and SFT are recorded on an accrual basis. Total unfunded loan commitments to corporations in the above-noted countries were $4.3 billion as at, 2012 (October 31, $4.5 billion). As well, as part of its lending activities to its corporate customers, the Bank may issue letters of credit on behalf of other banks in a syndicated bank lending arrangement. As at, 2012, these unfunded commitments with banks amounted to $3.4 billion in the table above (October 31, $3.3 billion). Within the securities portfolio, as at, 2012 the Bank had indirect exposure to Europe of $490 million in the form of exposures to non-european entities wherein their parent company is domiciled in Europe. Included in this indirect exposure was $151 million related to GIIPS; $177 million to United Kingdom; and $85 million to Germany. Indirect exposure by way of letters of credit or guarantees from entities in European countries to entities in countries outside of Europe, totaled $1 billion at, 2012; of which $328 million was indirect exposure to GIIPS. Indirect exposure is managed through our credit risk management framework, with a robust assessment of the counterparty. The Bank does not use credit default swaps (CDS) as a risk mitigation technique to reduce its sovereign cash exposures. With respect to banks and non-bank financial institutions and corporations, the Bank may on occasion use CDS to partially offset its exposures. Specific to GIIPS, as at, 2012, the Bank had CDS protection on the funded exposure on only one Spanish corporation in the amount of $45 million. Like other banks, Scotiabank also provides settlement and clearing facilities for a variety of clients in these countries and actively monitors and manages these intra-day exposures. However, Scotiabank has no funded exposure in these countries to retail customers or small businesses. Market risk Value at Risk (VaR) is a key measure of market risk in the Bank s trading activities. Beginning this quarter, VaR includes both general market risk and debt specific risk components. The Bank now also calculates a Stressed VaR measure. Stressed Value at Risk This risk measure uses the same methodology as the VaR process, however Stressed VaR is calibrated from a one-year period which is observed as being of significant stress. In line with regulatory requirements, the Bank utilizes the one year period over the last ten years that experienced the most extreme volatility to calibrate the Stressed VaR. Risk factor ($ millions) Average for the three months ended 2012 October 31 (2) (2) Interest rate $ 9.6 $ 8.1 $ 11.2 Equities Foreign exchange Commodities Debt specific (1) Diversification effect (14.6) (11.5) (12.5) All Bank VaR $ 17.5 $ 15.9 $ 14.7 All Bank Stressed VaR $ 37.8 $ 31.6 $ 27.0 (1) Debt specific risk was not disclosed previously. (2) Prior period amounts were restated to conform to current methodology. In the first quarter of 2012, the average one-day total VaR was $17.5 million, an increase from $15.9 million in the previous quarter, primarily due to higher interest rate and equity risk. The average one-day total Stressed VaR during the quarter was $37.8 million. There were two trading loss days in the first quarter, compared to fourteen days in the previous quarter reflecting lower volatility in capital markets. The losses were well within the range predicted by VaR. Incremental Risk Charge and Comprehensive Risk Measure The new Basel market risk capital requirements effective in 2012 include Incremental Risk Charge (IRC) and Comprehensive Risk Measure (CRM) which capture the following: Default risk This is the potential for direct loss due to an obligor s default, as well as the potential for indirect losses that may arise from a default event; and Credit migration risk This is the potential for direct loss due to an internal or external rating downgrade or upgrade, as well as the potential for indirect losses that may arise from a credit migration event. A Monte Carlo simulation tool is used for the obligors underlying the CDS and bond portfolios to perform default and migration simulations which are then applied to revalue the instruments. Both IRC and CRM are calculated to the 99.9th percentile with a one year horizon. A liquidity horizon of one year is applied. For CRM in correlation trading there is also a market simulation model to capture historical price movements. Scotiabank First Quarter Report